Monday, October 16, 2017

Milton
Friedman, an Economic Nobel Prize winner believed that the problem is this
world is concentration of power under a big government. Malaysia government’s
heavily involves (mostly indirectly through agencies or politically linked
figure) in ownership and/or control of major businesses. Huge public sector and
heavily regulated mass media, social media and freedom of speech through
variety of acts enable concentration of power to Malaysia ruling government.
Use (or misused) of Official Secret Act top up the possibility of conflict of
interest between public welfare and personal benefit.

Government in business

Table
2 shows that Malaysia government (through government-linked agencies) owned
more than 50% of shares in seven out of top 10 largest capitalization companies
listed in Bursa Malaysia. Public Bank, Maxis and Digi are the exceptions. These
heavily government-related companies are like indirect state-owned-enterprises
(SOE) and they are against free market and free competition.

Heavily
government involvement in business together with heavy regulation through
various acts and big public sectors bring two negative consequences to politic,
economic and social system. First is this type of big government may threaten
separation of power between legislative, executive and juridical which violated
the Westminster parliamentary system and results in holistic inefficiency to
almost everything. Second, we may have a system which in government is in a
position to give large favour.

According
to Friedman, it’s human nature to try to get this favour whether those people
are large enterprises, or whether they're small businesses like farmers, or
whether they're representatives of any other special group. The only way to
prevent that is to force them to engage in competition one with the other. To
have fair competition, government should not heavily owned businesses or
interfere unnecessarily.

Why
big government and big business co-exist may endanger fair competition? Friedman
believed that no business can get money from us unless we voluntarily pay it
off and think we are getting every dollar worth in return. In fair competition,
business can only earn your money if they can produce a product you think worth
buying. However, a business may indirectly get money from you by operating on
government to impose tariffs on foreign or domestic competitors’ products. Sound
familiar to the protected automobile industry? How about the way government
awarding operating licences and contracts? How about the government trying to impose
restrictive regulations or even ban competitors -- like possible request from
taxi drivers to government to ban Uber and GrabCar? Is there any benefit having
politically-linked figure in company’s directorship?

Some
historical lessons

Political interference
into business is against laissez faire system, which the government advocate
but not practice. As results, cronyism, nepotism and corruption became
omnipresent flavours in Malaysia’s political economics. Some historical lessons
we should not repeat.

(a) Anchor banks or political bank?

In mid-1999 post Asian
financial crisis, Daim Zainuddin (then Finance Minister) proposed merger of 58
financial institutions into six “anchor banks”, which later controversially expend
to ten. At that time, few big banks that their main shareholders were believed
to have close associate with Anwar Ibrahim (who was being sacked by Mahathir
around that time) were surprisingly not selected. If the selection of anchor
banks based on political alliances rather than performance and ability, how can
our banks be strong and efficient? Far Eastern Economic Review (5 July 2001) and
Professor Terence Gomez of Universiti Malaya also questioned the corporate and
public governance in Malaysia, particularly on these cases: Pos Malaysia sudden
privatization and sale to PhileoAllied Bank; shareholdings by politically
linked persons in banking sectors; fall-out between Mahathir and Daim that may
impact on decisions in banking reform; and the UMBC scandals. All those are the
past. Yet, are Malaysian economy now free from rent-seeking and cronyism?

(b)Not enough check-and-balance since previously
until now

Professor Terence Gomez
is a hard critic of political interference and patronage in Malaysia business.
Among some issues he highlighted is then Prime Minister Mahathir
self-appointment to hold the portfolio of Finance Minister. This Mahathir’s
move has since become like a “tradition” where Abdullah Badawi and Najib Razak
also holding the Finance Minister portfolio. With substantial government-linked
holdings in major companies in Malaysia, is there a healthy check-and-balance
to ensure fair competition and efficiency? Have we forgotten Operasi lalang and judiciary system
turmoil in 1987? If businesses in Malaysia remain in the power of private-and-non-political
entities, at least business and civil society still can give constructive pressure
to the government and act as healthy check-and-balance.

(c)Failed privatization to be repeated?

Two of the objectives
of privatization policy in 1983are
(a) to relieve the government’s financial burden by reducing the size and
presence of the public sector in the economy; and (b) to improve work
efficiency and productivity, thus facilitate economic growth. Continuously
heavy government ownership or indirect control in private business until
nowadays is a big slap to the privatization policy.

Malaysian
businesses should not operate based on “human-lead” basis like having a
political-linked figure as directorship or solely relying on the
entrepreneurship of its founder or a particular key-personal. The whole economy
should not be dominated by government’s investment and control. The healthy and
more sustainable way should be developing a system leadership, which is
efficient, strong, fair and free from (or minimize) personal conflict-of-interest and unnecessary
greed.

Human
versus System leadership

A
good leader can bring success to a team, a company or a country. However, this
leader is a human, which has its own weakness of greed when bestow upon power
and seduce by luxury. The human leader may be dampened by fear when facing
challenges and threat beyond his ability. This human leader is also a mortal
and will retired and die one day. The replacement may not be that good.

All
these will be different if the human leadership is replaced by system
leadership. Anyone follow European football can use Manchester United and
Barcelona as examples. Manchester United flourishes due to Sir Alex Ferguson’s
leadership. His retirement is greatly felt and hardly replaceable. During Sir
Alex’s tenure at Manchester United (1986 – 2013), Barcelona football team has 15
managers yet they still as strong as ever. This is a good example of human
leadership for Manchester United (under Alex Ferguson) against system
leadership of Barcelona.

Conclusion

It
is good IF Malaysia has a Prime Minister of Alex Ferguson’s leadership ability
and enjoys the success like Manchester United. However, it is better to develop
a Barcelona’s system leadership for sustainable success. The utmost important
fundamental for a system leadership is strong and efficient. For economics
efficiency, Malaysia needs to create a system leadership based on (i) fair and
quality competition environment and (ii) small but efficient government. These
involves amending the affirmative policy, reducing the current size of public
sector, reducing government involvement in domestic businesses and abolishing
any unfair or suppressive laws and regulation. As for strength of the system, a
neo-legalism (fa jia) is proposed and shall be discussed in another article.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A9 on 1st August 2016. Available online at www.enanyang.my/news/20160801/损企业竞争力-整体效率低下br-政府参商适得其反. This English version may be slightly different from the Chinese online/printed newspaper version]

Unorganized soldiers
will never going to win war. Workers without proper instruction do not know
what should be done. Good system is needed not only for soldiers and company/workers
but also for the economy. A “good” system (either for economy, politic or
social) should have two fundamentals with different layer of priorities. First
layer of fundamental is “strong and efficient”. Second layer is “compassion”. A
weak system easily being corrupted and change too rapidly. Look at Malaysia
education system especially from secondary to tertiary level. How frequent it has
been changed? Yet, what is our standard and efficiency as compare internationally?
Look at Malaysia’s system to combat corruption? Why money politics, money
laundering, underground activities and high profile corruption-related cases
remain unsolved or “closed case”? Strong system does not guarantee efficiency
but week system never going to be efficient or consistent.

“Compassion” is
important but should be pushed to second layer in designing a good system. Take
this example of parents teaching their child. Over compassion (caring) to the
child may spoil him/her. Cane and strong character parents (system) may push
the child (economy) to be more efficient. Only after achieving efficiency, then
comes compassion because the rewards or benefits of economic growth (due to
having strong and efficient systems) should be re-distributed back generously
to the people. Then, this strong and efficient system will be supported by the
people and economic prosperity can be sustained.

In our previous article
(published at same column on 20th June 2016), we highlight two
aspects need foremost attention for remodelling a strong and efficient
(economic) system. They are (i) the needs to induce fair domestic competition
and (ii) reduce big government systems (will be discussed here). Having a small
government has three inter-related benefits. Firstly, big government’s (extreme
case is dictatorship) decision is usually less efficient than free market
outcome. Secondly, big government tend to lead to corruption, cronyism and
biasness towards certain groups and thus making competition unfair. This is
strongly advocated by Milton Friedman, an Economic Nobel Prize winner. Third,
big government is an unnecessary financial burden where public money can be
allocated to better use other than supporting administration expenses of an inefficient
and oversized public sector.

Over-size
public sector is a drag

Comparative statistics
in Table 1 show that Malaysia public sector is either over-size or not
efficient. This means that to achieve comparative efficiency like developed
countries, employees of public sector needs to be either (i) reduce in size or
(ii) increase in their contribution to overall economy output. Of course the
easier solution is the first one – reduce in size from a big government to a
smaller one.

Based
on Table 1, Malaysia spend almost one third (29.5%) of the gross domestic
products (GDP) to pay wages and various compensation to public servants. This
percentage is near to three times higher than South Korea, Australia and
Germany. It is about twice the percentage for Singapore and United States
government. Notice that United Kingdom spent 13.8% of their GDP on compensation
to public servant is relatively high compare to other developed countries. This
may be due to the data included the less developed Northern Ireland as compared
to England itself.

High
percentage of “compensation to (public sector) employee to GDP” (column 2 in
Table 1) is consistent with high total percentage of “total government
expenditure allocated for compensation to (public sector) employee” (column 1).
Malaysia’s 5.80% is comparable with United Kingdom, better than Thailand and
France but relatively much higher than other developed countries and even
Indonesia. If the countries allocated way too many expenses for purpose of
administration as compare to economic development purposes, it will not
conductive to promote growth in long term. It is like a company spending
majority of its revenue on administration with not enough budgets on marketing,
training and technology improvement.

France
is a good case of negative impact of high expenses on public sector
administration. It indicates government is either too big or inefficient or
both. In current debate on Great Britain exiting European Union (popularly
known as “Brexit”), France’s bad economic management (high unemployment and
slow GDP growth) is used as argument to support Brexit. Regardless of whatever
impact of European Union on France, the statistic in Table 1 can be a good
indicator or predictor of a trouble economy. What will happen to Malaysia’s
economy if we keep on pampering too much of our resources (money) to public
sector, which has improved but still way behind developed nation standard?

To
achieve standard of developed countries or at least prevent bad economy in near
future, Malaysia needs to cut the public sector at least by half. Will there be
chaos if we do cut down the public sector by half? Yet, are we willing to let
the big government to drag our economic growth? It is a choice that most likely
not preferred by current government.

Table
1: Government Expenditure on Compensation to Employee

Country

Percentage of total government
expenses (%)

Percentage to GDP (%)

Malaysia

5.80

29.5

Singapore

3.65

28.8

Indonesia

2.24

15.0

Thailand

7.11

39.6

South
Korea

1.87

10.2

Australia

2.75

10.5

Germany

1.73

11.9

France

9.45

39.6

United
Kingdom

5.95

13.8

United
States

2.57

16.4

Source: World Bank; statistic
shown is average from 2010 to 2012 (latest available data) all variables are in
current term and local currency unit.

Lesser bureaucracy, Easier “Doing
Business”

As Malaysia strives to achieve
developed nation status, conductive business environment is important. This
includes easiness of doing business in Malaysia. In this aspect, credit should
be given to former Prime Minister Abdullah Badawi. Through special agency named
PEMANDU (Performance Management and Delivery Unit), he initiated reformation to
reduce the bureaucracy in public service. Subsequently, it did reduced not only
waiting time for both consumer and business but cost of doing business.

Since Abdullah’s era, the cost of
to start a business (as percentage of income per capita) has been reduced from
around 27% in 2014 to 6.7% in 2016. This is a good achievement even though the
percentage is higher than developed countries like Singapore, Australia,
Germany, France, United Kingdom and United States. See Table 2. Procedure
required to start a business is also reduced from 10 in 2005 to just 3 in 2016.
Malaysia is ranked no. 18 out of 189 countries in “ease of doing business”.

Yet, beware that this remarkable
statistics may get worst if public sector is getting bigger and thus, becoming
a financial and efficiency burden.

Table 2: World Bank’s 2016 “Doing
Business” International Comparison

Country

Ease of doing business rank

(1st to 189th)

Cost to start a business (% of income
per capita)

Procedures required to start a business
(number)

Malaysia

18

6.7

3

Singapore

1

0.6

3

Indonesia

109

19.9

13

Thailand

49

6.4

6

South
Korea

4

14.5

3

Australia

13

0.7

3

Germany

15

1.8

9

France

27

0.8

5

United
Kingdom

6

0.1

4

United
States

7

1.1

6

Source:
“Doing Business 2016” yearly report at www.doingbusiness.org. “Doing Business” is under World
Bank.

Summary

If we take economic
analysis as human anatomy, public sector is like our blood vassals. It must not
be too large or too small but must be efficient to enable blood (economic
activities) to circulate to all over our body (whole economy/country).
Unfortunately, Malaysia public sector is too large. Yet, ruling government may
face serious negative consequences from public servants if they try to downsize
to force improvement of efficiency. The consequences may vary from protest to
loss of votes in general election. Has Malaysian public sector has becomes too
big to fail?

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 25th July 2016. Available online at www.enanyang.my/news/20160725/推动公共改革br-小政府大效率夏伟文、陈薛卉. This English version may be slightly different from the Chinese online/printed newspaper version]

Monday, October 24, 2016

(打造高效可持续增长基础重塑系统需公平竞争)夏伟文 & 陈薛卉 (20 June 2016)A barren land may
produce few big trees but not a forest. Malaysia has a world badminton champion
in Datuk Lee Chong Wei but didn’t have enough champion players to make a world
champion team. One dominant reason for this is the “system”. Portugal and
Argentina may have Ronaldo and Messi winning the world best player award for
record of times but it is the German system that produce enough talents and
good fundamental (include technical expertise and teamwork) to perform
consistently at highest level and then, finally won the football World Cup.

Therefore, the
foundation of high and sustainable economic growth should be good system in
every aspect. In November/December 2014 article in this same column, we
proposed a new analysis model as in Figure 1. As we can see, the “system” plays
critical role as catalyst or platform to enable development for “human”, “science
& technology” and “capital”. The “system” is akin to “soil, environment and
root”. If it is good, it will grow strong branches in the form of “human”,
“science and technology” and “capital”. Those branches will bear fruits of
economic growth.

Figure 1: Four Economic Triangles

Unfortunately, some of main systems we are using now
are ineffective, thus did not provide good platform for holistic and
sustainable growth. Two aspects need foremost attention for remodelling. They
are (i) the needs to induce fair domestic competition and (ii) reduce big
government systems (will not be discussed here).

Fair competition within
New Economic Policy framework

Officially, New
Economic Policy (NEP) has ended in 1990 after a lifespan of 20 years. Subsequent
policies are like “old wine in new bottle”, which make NEP like never ended.
NEP has two main objectives which can be considered as “practical” rather than
“racist”. It first objective aimed to eradicate poverty irrespective of races.
The second objectives is to restructure Malaysian society to reduce identification of race from economic
function with the purpose that Malays and other indigenous groups play full
role in all aspect of economic function. This second objective is actually fair
despite look like bias to Malay group. In general, the NEP (as well as any
other affirmative policy in other countries) is actually based on Rawlsian
welfare principle to maximize the welfare of the least well-off members, which
in Malaysia case is the Malay group. With an extra push from privatization
during Mahathir’s era, NEP successfully eradicated overall poverty and uplift
Malay and indigenous group’s welfare, income and involvement in the economy.
Thus, income distribution becomes fairer and the economic growth became
healthier.

Taking
a neutral and academic point of view, the problem of NEP (the Rawlsian-based
system) is its longevity. Giving “unconditional” advantage with no expiry date to
the least well off group will cause dependency. Dependency comes with (i)
expectation that the advantage will be forever coming, and (ii) fear of losing
everything if this advantage is gone. These will lead to slower improvement in
productivity, cause misallocation of resources and give chances for political
manipulation. The important thing here is NOT asking for completely removal of
these advantages but to at least make it “conditional”, which is competition
and synergy cooperation for both intra and inter groups.

A
historical case of affirmative policy during the Germany re-unification in 1990
can be used as reference. During that time, Eastern Germany was ways behind
West Germany. Robert J. Barro (Professor of Economics in Harvard University) in
his book “Nothing is Sacred (2003: 95 - 101)” highlighted that Eastern Germany
was given a lot of advantages. These advantages include a one-to-one currency
conversion rate, taxing the West to aid the East development programs and
wage-equalization effort. Like Malaysia, both are Rawlsian welfare system. As
results, wage and salary payments per worker in eastern region (exclude Berlin)
increased from 49% of the western region (include Berlin) in 1991 to 75% in
1995 and 77% in 2000.

However,
productivity (measure in “gross domestic products per worker) grew much slower.
In 1991, eastern region’s productivity is 31% of the western region. It only
grew to 46% in 1995 and 48% in 1997/98. Meanwhile, between 1992 to early 2001,
unemployment rate in the eastern Germany is about 6% to 8% higher than western
region. In addition, Barro also criticized the Germany government’s transfer
and subsidized policies (welfare system) that retarded migration from east to
west. He believed more westerner working in the higher productivity environment
of the west would be better.

These
reflect that wages convergence can be forced through government policies but it
cannot improve economic fundamental, which in this case are high productivity
and low unemployment. It is like the government planting an adult tree in an
unfertile land and hope the tree will grow healthily ever after.

Back to Malaysia,
advantages in the name of welfare should not be overly-extended to the less
productive people (regardless of race) and low value-added industries or
economic sectors unconditionally as it may retard the country’s long term productivity
growth. Others programs like Bantuan Rakyat 1Malaysia (BRIM) that did not help
in increasing productivity or economic efficiency should be stopped. Education
scholarship, research grant, entrepreneurship grant and others financial
support should be given to the needed but by merit.

Figure
1: GDP per person employed Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from
World Bank. The number represents percentage of different (Singapore minus
Malaysia) divided by Malaysia GDP per person employed.

There is no data on GDP
per person employed (proxy to productivity) for both Malaysia and Singapore prior
to year 1991. However, the trend after 1991 in Figure 1 implies that (i)
Singapore’s productivity is way above Malaysia, and (ii) Malaysia’s
productivity was very vulnerable (drop drastically) during crisis years like
1997/98 to 2000 and 2008 to 2010. Throughout those years, every worker in
Singapore produces about 2.5 times to 3 times more output than workers in
Malaysia.

Figure
2: GDP per capita Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from
World Bank. The number represents percentage of different (Singapore minus
Malaysia) divided by Malaysia GDP per capita.

Figure 2 reveals
equally embarrassing comparison. The different between Singapore’s GDP per
capita goes up to 400% of Malaysia GDP per capita. In another words, average
output per Singaporean is five times every Malaysian. Thus, what can we say
about the long-term effectiveness of our affirmative policy and other development
plans?

Solutions

Two simple solutions
may be applicable. First is promotes fair competition in everything from
government’s welfare support and procurement to providing business opportunity.
Even with protective privilege to the Bumiputera group, creating competition
within them may be very helpful in increasing efficiency and productivity. Same
can be applied to protect domestic infant industries from foreign competition
but at the same time promote domestic competition. United States, Japan and
South Korea did practiced protectionism economy before their industries become
strong. Yet, very fierce domestic competition existed to ensure rapid growth of
strength. History has proven this solution. Malaysia protects domestic
industries but lack of competition. Can our airline, automobile and
telecommunication compete with foreign companies?

Second proposed
solution looks weird but seems indirectly worked well in United States. It is
to legalized abortion. Since 1991, homicide and violent crime in United States
has fallen dramatically by 44% each. Rate for property crime has also reduced
by about 50%. Research study by John Donohue (Stanford Law School) and Steven
Levitt (University of Chicago) found that legalization of abortion in the
1970s. The logic is that “those children who were not born (abortion) would
have been more likely to grow up in poverty and on welfare with a young and
poorly educated single parent” (see Barro, 2003: 74 – 77). These unborn
children would have been prime candidates to be criminals fifteen to twenty-five
years later. Hence, their absent would contribute in drop of crime rate and
perhaps also reduce government’s social welfare burden and improve overall
productivity. There will be lots of debates on humanitarian ground versus
practical needs.

Summary

Competition may be
cruel. Only the fittest is to survive but this is the best system for
civilization to grow and prosper. Even human genetic will automatically select
the best gene to ensure our survival and growth. On the other hand, mercy is
needed to correct the initial imbalances of strength. Helping hand (affirmative
action) ensures the weak ones to grow strong one day and provide fair
competition to the rest. Yet, beware that if we give unlimited mercy on the
weak ones, we are also taking away their incentive and urge to improve.